In medieval England, and especially outside London, it was customary for ship owners to form groups to agree to insure each other against the perils of the sea. Thus, if one ship was lost, the others would cooperate to compensate for the loss. This practice of forming de facto societies evolved over time, due to market changes or legal reforms, eventually becoming what we now know as Protection and Indemnity Clubs.
By Leonidas Villagran
UMED Protection and Indemnity Associations, known as P&I Clubs, or Pandi Clubs, are entities comprised of shipowners who, in a mutual system, provide marine insurance coverage for all those civil liability risks not covered by hull and machinery policies. History reveals that since the 18th century in England, with the enactment of the Bubble Act of 1720, a virtual monopoly was created for two companies in the marine insurance business, as corporations were prohibited from entering into this business unless authorized by royal decree. However, the Bubble Act did not prohibit individuals from insuring against maritime risks. This facilitated the formation of the Lloyd’s insurance market, as well as the grouping of vessel owners who established mutual clubs or associations to provide themselves with protection against maritime risks. The main characteristic of the mutual system is that each member contributes to the claims of the other members. (Gurses, 2015, p. 3)
History also reveals that the initially named protection associations originated in Mutual Hull Clubs, groups of owners who banded together and self-insured against damage to their vessels. These clubs were mostly organized in different ports in England other than London, as an alternative to the Lloyd’s insurance market.
The concept of these Clubs began to evolve from hull protection to liability protection due to market changes, as well as the decision in the case of De Vaux v Salvador [1836], which denied that Hull insurance policies covered liability arising from collisions. This created an immediate need to cover this risk.
The hull insurance market, through the RDC “running down clause,” protected against this risk, but only up to three-quarters of the value and limited to the vessel’s value. This clause became standard in insurance policies in the English market and is still known by this name, as well as by the “Liability Collision Clause.”
Thus, hull insurers were not willing to insure all liability risks resulting from a collision. The intention was for vessel owners to assume part of the risk. This facilitated the creation of shipowners’ associations, initially known as Protection Clubs, to self-insure against the portion of risk not covered by hull insurance.
Additionally, the 19th century brought dramatic legislative changes in England, enough to generate a new need for marine insurance coverage. The Fatal Accidents Act of 1846 established legal rights for the families of crew members to claim compensation in the event of death in accidents. Similarly, the Harbor, Docks and Piers Clauses Act of 1847 regulated damage caused by ships to port facilities, and the Employers’ Liability Act of 1830 was also passed. The provisions of these laws created liability for shipowners, and this liability began to be covered by Protection Clubs.
The P&I Clubs we know today, which included “Indemnity” coverage, began to take shape due to the need for additional coverage generated by court decisions that restricted exclusion clauses in contracts for the carriage of goods and consequently established guidelines for liability in maritime transport for cargo. (Anderson & de la Rue, 2011, p. 1261).
In reality, it had been common practice for shipowners to include clauses in these contracts that practically released the carrier from all responsibility for the cargo. With the new trend, the doctrine of laissez-faire, or total freedom of contract, began to lose its absoluteness, as it became necessary to limit it to balance the negotiating power between carriers and shippers. This was enshrined internationally in the Hague and Visby Rules (the International Convention for the Unification of Certain Rules Relating to Bills of Lading – the 1924 Hague Rules – and the amendments with the 1968 Protocol – the Visby Protocol), to which Ecuador is a party.
Currently, P&I coverage for approximately 90% of global tonnage comes from 12 member associations of the International Group of Protection and Indemnity Clubs.[1](IGP&I, 2016) International Group of Protection and Indemnity Clubs.
The Swedish Club, UK P&I Club, Skuld, Britannia, Steamship Mutual, Gard, The London P&I Club, West of England, NORTH, Shipowners, The American Club, and Japan P&I Club are members of the International Group, with headquarters in the United Kingdom, but also with branches in Sweden, Norway, the United States, and Japan.
The Britannia Steam Ship Insurance Association (The Britannia Club) is listed as “the oldest P&I in the market,” “doing business since 1855” [2].
P&I Clubs are also found in other parts of the world, such as The Korea Shipowners™ Mutual Protection & Indemnity Association (Korea P&I)[3], the Noord Nederlandsche P&I Club4, China Shipowners Mutual Assurance Association (China P&I)[5], and The Turkey P&I (Turkey)[6].
The mutual concept can still be found in hull coverage, as in the case of the Norwegian Hull Club[7], as well as in other specialized coverages such as the TT Club[8] focused on logistics and containers[9], and The German Shipowners Defense Association[10] (German FD&D Club).
Some insurance companies provide P&I coverage without being formally affiliated with associations, such as AMLIN[11], and other large insurers like AIG have included marine liability coverage in their portfolios[12] in order to participate in the market. An example of a P&I Club that decided to transform itself from a mutual association into an insurance company is British Marine[13], which occurred in 2000 (British Marine, 2016). More recently, North and Standard merged. In 2016, North and Britannia attempted to merge, but the deal did not go through (Britannia, 2016).
A Collision Incident
As an example, a container ship approaching the dock collided with a tanker that was unloading its cargo of sulfuric acid. This collision[14] resulted in the tanker sinking and spilling some of this toxic substance into the bay waters, as well as damaging the dock and its unloading facilities. The container ship also sustained damage to its hull and a partial bunker fuel spill. After the incident, the container ship was inspected and detained, and the cause of the incident was determined to be that the vessel was not seaworthy. Insurers will need to verify the details of the facts surrounding this decision.
In this regard, if a container ship is insured under the London market, with a voyage policy for a fixed term, and the condition of unseaworthiness existed before the ship sailed, with the insured’s knowledge, then the insurers have the right to deny liability if the loss is related to that unseaworthiness. The same applies to a voyage policy if the vessel began its voyage in that condition, even without the shipowner’s knowledge, taking into account the implied guarantee or condition of the vessel’s seaworthiness at the start of the voyage, ratified by the English Marine Insurance Act of 1906.
While in the Common Law world this is an implied condition, in different civil law jurisdictions this breach is considered an exclusion in cases of losses caused by unseaworthiness.
The Nordic Plan takes a different approach by denying liability arising from the insured’s negligent “failure to comply with safety regulations” in connection with the loss, as set out in Clauses 3-22 and 3-25 (Pavliha & Padovan, 2016).
Regarding the coverage provided by English P&I Clubs,[15] “provisions relating to seaworthiness have a role to play.” Membership in a P&I Club is considered a term policy, and consequently, the guarantee principles and rules of such P&I Clubs apply (Soyer, 2006).
The updated rules of the eight English P&I Clubs that are members of the International Group incorporate all the provisions of the English Marine Insurance Act 1906, as well as those of the new Insurance Act 2015, which came into force on August 12, 2016. However, all the rules of these English P&I Clubs exclude sections 10 and 11 of the Insurance Act 2015. This means that a breach of a guarantee releases the P&I Club from liability in the event of a loss, from the date of the breach, even if the breach has been remedied and even if the breach is unrelated to the cause of the loss.
These provisions are found in: The UK P&I, Rule 5L, NORTH Rule 6(1),(2)(b),(c), West of England Rule 21(1)(b)(c), Britannia Class 3 Rule 3 3(5), Steamship Class 1 Rule 7 IV, London Class 5 Rule 43 43.1.1, Shipowners Rule 1, II A, B, and Standard Section A 1.5.1 and 1.5.2.
The exclusion of coverage in relation to the Nordic P&I Clubs relates to the conduct of the shipowners in connection with the loss. Gard excludes coverage when the loss results from the “intentional misconduct” of the Club Member, such misconduct being an intentional act or deliberate omission by the Member with knowledge that the act or omission is likely to result in damage.[16] The Swedish Club excludes coverage caused by the “intentional or negligent acts or omissions of the Member,” taking into consideration that the Member knew or should have known that they would give rise to liability.[17]
Potential Liabilities of Shipowners
A collision can have a domino effect on third-party liability, as well as generate multiple insurance claims. In such a case, a damage and liability analysis is necessary, as well as immediate action to avoid or minimize such damage and liability under the obligation arising from the “sue and labor” clause.
Liability in Collisions
It is important to consider that a collision per se does not automatically generate liability. Even under Ecuadorian law, liability must be determined in the event of a collision (or collision between vessels). Here, the universal doctrine of determining fault to assign responsibility applies. Liability for collisions, as well as for collisions with floating or fixed objects, depends on “determining acts of fault that caused or contributed to the damage incurred” (Schoenbaum, 2004, p. 757).
The example of the incident mentioned shows that the tanker was at the dock unloading when the container ship struck it. Under English law, the owners of the container ship could argue that the collision was not the result of a negligent act but an “unavoidable accident” in connection with an unknown engine failure. However, if the cause of the collision cannot be determined, then this claim would not be accepted, as established in the judgment of The Merchant Prince [1892] p. 179. In that case, it was alleged that the collision resulted from an unknown latent defect in the ship’s steering system, which caused a subsequent rudder lock. However, the Court of Appeal denied the application of the unavoidable accident exception because the cause of the accident could not be proven. (McKoy, 1999)
The container ship has potential liability for the damage caused to the tanker, including its cargo, as well as for the damage to the dock caused by the collision. The tanker owners may recover their losses based on their Hull and Machinery insurance and may also have the option of claiming unavoidable accident to avoid liability for damage to the dock.
The container ship’s liability arising from a collision with a tanker is covered by hull policies in the UK market under the Running Down Clause (RDC). Legal costs for contesting liability or initiating liability limitation proceedings are also covered by this clause. The coverage amount depends on the specific clause applied. This also applies to liability arising from collisions with floating or fixed objects (such as the dock).
Liability coverage for collisions with floating or fixed objects (FFO) always depends on the hull policy. It’s important to remember that P&I Clubs provide coverage for liabilities not covered by the hull policy. Consequently, if standard UK market coverage applies, the hull insurer will indemnify you for three-quarters of the liabilities, given that the limit is 75% of the insured vessel’s value. The P&I Club’s coverage will cover the remaining portion not covered by the hull policy. Regarding impact with floating and fixed objects, the standard clauses of the London market do not provide coverage, so in this case the risk is insured with the P&I Clubs.
However, if the insurance contract under English rules is based on the International Hull Clauses, applying the amendments to provide coverage for 4/4 liability and any liability related to collisions with FFOs, then the P&I Club will no longer need to provide coverage. On the other hand, full coverage for liability in a collision or collision with FFOs is a specific feature of the Nordic market, considered in the industry’s standard clauses.
A collision results in the sinking of the tanker and the loss of its cargo. Hull clauses exclude coverage for cargo on board the insured vessel. P&I Clubs provide such coverage. However, to avoid liability for the cargo, the tanker owners can invoke immunity based on the Hague and Visby Rules, Article IV r2(c), relating to perils and accidents at sea or on navigable waters. Ultimately, liability will most likely be awarded to the container ship owners if fault for the collision is established on their part.
The incident could result in injuries or even fatalities, loss of personal belongings of the crew, and loss of income for crew members on both vessels, who may need to return to their countries. Furthermore, the authorities may require the removal of the wreckage and immediate action to mitigate pollution. All of this is duly covered by P&I Clubs, in accordance with their rules.
Pollution
A report sponsored by the United States Coast Guard in July 1980 established that mixing water with sulfuric acid generates a large amount of heat, which vaporizes and forms an acid cloud in the atmosphere. This cloud could pose an immediate danger to anyone directly involved in an accident and, under adverse weather conditions, could threaten the safety of people nearby. The spill can also harm marine life (Tang, Wong, Munkelwitz, & Flessner, 1980).
The spill, therefore, poses an imminent danger to people near the incident. However, an additional incident could occur if winds carry the acid cloud toward the city. This situation could become more complex if the remaining sulfuric acid in the tanks mixes with the water, potentially causing an explosion.
Potential health effects of contact with sulfuric acid or the acid cloud include irritation or chemical burns to all types of body tissue (Teck Cominco American Inc., 2003). Inhalation can cause death or permanent damage from pulmonary edema. It has also been associated with laryngeal cancer. (CCOHS, 2016)
Depending on the location of the incident, contamination by toxic substances such as sulfuric acid may fall under the doctrine of strict liability and the polluter pays principle. The HNS Convention[18] and its 2010 protocol establish these principles but have not yet entered into force. If the incident occurs in a member state of the European Union, according to Directive 2004/35/EC of the European Parliament and of the Council of 21 April 2004, under the doctrine of strict liability, there is no need to prove fault to establish liability. (European Commission, 2016). The concept of strict liability, or non-fault liability, means that the shipowner is responsible simply because their vessel causes pollution (Zhu & Zhang, 2015, p. 376).
Any pollution incident generates immediate public and media concern. Authorities must initiate administrative actions and, in some cases, even investigations to determine whether an environmental crime has been committed. It is expected that third-party claims will be filed for damages caused by the pollution.
Regarding pollution that could be generated by a bunker fuel spill, the Bunkers Convention[19] applies, which establishes the principle of strict liability as well as the right to take direct action against insurers.
P&I Clubs provide coverage for liabilities arising from collisions with other vessels[20] and damage to property or FFOs[21], coverage for vessel debris removal[22], towing[23], salvage[24], cargo on board[25], property damage[26], all types of personal property on the covered vessel, personal injury or illness, repatriation and compensation for the crew, wages[27], and pollution[28]. The Clubs also provide coverage for related legal expenses[29] and related fines[30].
As mentioned, a collision can result in multiple damages and liabilities, including criminal charges. Immediate action is required to prevent and minimize damages and liabilities.
Marine accidents can occur in different parts of the world with different jurisdictions and legal systems. The advantage of P&I Clubs in the event of an accident is the development of correspondents, who assist shipowners and captains at the scene of the incident.
BIBLIOGRAPHY
Anderson, C. B., & de la Rue, C. (2011). The Role of the P&I Clubs in Marine Pollution Incidents. Tulane Law Review .
Anderson, P., & Donner, P. (2016). P&I Clubs and Mutual Insurance. World Maritime University, Lloyd’s Maritime Academy.
Britannia. (2016). Britannia Steam Ship Insurance Association Ltd. Retrieved 3 14, 2016, from http://www.britanniapandi.com
Britannia. (2016). Brittania P&I Rules Class 3. London.
British Marine. (2016). British Marine. Retrieved 3 12, 2016, from Terms and Conditions 2016/2017: http://www.britishmarine.com/documents/products/bm_pi_terms_feb_2012.pdf
CCOHS. (2016). Canada Center of Occupational Health and Safety. Retrieved 3 16, 2016, from Sulfuric acid: http://www.ccohs.ca/oshanswers/chemicals/chem_profiles/sulfuric_acid.html
European Commission. (2016). European Commission. Retrieved 3 14, 2016, from Environment: http://ec.europa.eu/environment/legal/liability/
Force, R. (2013). Admiralty and Maritime Law. Washington DC: Federal Judicial Center .
Gard AS. (2016). Rules 2016. Norway.
Gurses, O. (2015). Marine Insurance Law. London: Routledge.
Hakkinen, J., & Posti, A. I. (2014). Transnav The International Journal on Marine Investigation and Safety on Sea Transportatino. Retrieved 3 12, 2016, from Review of Maritime Accidents Involving Chemical – Special Focus on the Baltic Sea: http://www.transnav.eu/files/Review%20of%20Maritime%20Accidents%20Involving%20Chemicals%20%E2%80%93%20Special%20Focus%20on%20the%20Baltic%20Sea,510.pdf
Hanninen, S., & Rytkonen, J. (2006). Retrieved 3 12, 2016, from Transportation of liquid bulk chemicals by tankers in the Baltic Sea: http://www.vtt.fi/inf/pdf/publications/2006/P595.pdf
IGP&I. (2016). International Group of Protection and Indemnity Clubs. Retrieved 3 14, 2016, from http://www.igpandi.org/about
McKoy, K.-A. (1999). Collisions, a legal analysis (Paper 187 ed.). Malmo: World Maritime University Disertations.
North of England P&I. (2016). 2016-17 P&I Rules. London.
Pavliha, M., & Padovan, A. V. (2016). The Law of Marine Insurance. In The IMLI Manual of International Maritime Law Volume II: Shipping Law (pp. 620-622). London: Oxford University Press.
Rose, F. (2012). Marine Insurance, Law and Practice, 2nd edition. London: Informa.
Schoenbaum, T. J. (2004). Admiralty and Maritime Law. Washington DC: Thomson West.
Shipowners. (2016). Shipowners P&I Rules Section A. London.
Soyer, B. (2006). Warranties in Marine Insurance. London: Cavendish Publishing.
Steamship Mutual. (2016). Steamship Mutual P&I Rules.
Tang, I. N., Wong, W. T., Munkelwitz, H. R., & Flessner, M. F. (1980). Sulfuric Acid Spills in Marine Accidents. New York.
Teck Cominco American Inc. (2003). Imperial College London. Retrieved 3 16, 2016, from SULFURIC ACID MATERIAL SAFETY DATA SHEET: http://www3.imperial.ac.uk/pls/portallive/docs/1/7276136.PDF
The London P&I Club. (2016). London P&I Rules Class 5. London.
The Standard. (2016). The Standard P&I and Defence Rules. London.
The Swedish Club. (2016). Rules for P&I Insurance. Gothemburg.
The UK P&I Club. (2016). The United Kingdom Mutual Steam Ship Assurance Asociation (Bermuda) Ltd. Rules 2016 . London.
West of England. (2016). 2016 Rules of Classes 1&2. London.
Williams, R. (2013). Gard. Retrieved 3 12, 2016, from Gard Guidance on Maritime Claims and Insurance: http://www.gard.no/Content/20823111/Gard%20Guidance%20on%20Maritime%20Claims_final.pdf
Zhu, L. (2009). Can the Bunkers Convention Ensure Adequate Compensations for Pollution Victims?
Zhu, L., & Zhang, M. Z. (2015). Insuring Against Marine Pollution Liability: An International Perspective. Journal of Maritime Law & Commerce .
[2]http://www.britanniapandi.com/about/company-profile/
[5]http://www.cpiweb.org/index.jsp
[6]http://www.turkpandi.com/home-en-US/
[10]http://www.shipdefence.de/
[12]http://www.aig.com/Marine-Liability-Insurance_3171_417780.html
[13]http://www.britishmarine.com/about-us/history.asp
[14] Abordaje es el impacto con otra embarcación.
[15] Cuando se refiere a «Clubes Ingleses P&I» es de entender que se tratan de Clubes que sus regulaciones contractuales de seguros están sometidas a la jurisdicción Inglesa, ya que hay algunos clubes de este tipo, con origen Inglés que han preferido por estrategia establecer domicilio legal en otras jurisdicciones, pero sus Reglas continúan bajo las leyes inglesas
[16]Gard Rule 72
[17] The Swedish Club Rule 11, Section 1
[18] The International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, 1996
[19] International Convention on Liability for Bunker Oil Pollution Damage
[20]North Rule 19 (10), Gard Rule 36, West of EnglandRules of Class 1 section 9, The UK Club Rule 2 section 10
[21]North Rule 19 (12), Gard Rule37, West of England Rules of Class 1A section 10, The UK Club Rule2 section 11
[22]Gard Rule 40, The UK Club Rule 2 section 15, North Rule 19(14)
[23]Gard Rule 43, North Rule 19 (15), West of England Rules of Class 1A section 12, The UK Club Rule 2 section 13
[24]Gard Rule 42, West of England Rules of Class 1 section 20, North Rule 19 (23), The UK Club Rule 2 section 21
[25]Gard Rule 34, North Rule 19 (17), The Swedish Club Rule 4 section 1
[26]Gard Rule 39, The Swedish Club Rule 7, section 1
[27]Gard Rule 27, The UK Club Rule 2 sections 1, 2,3,4,5,6,10, North Rule 19(1),(10)
[28]North Rule 19 (13), Gard Rule 38, West of England Rules of Class 1A section 11, The UK Club rule 2 section 12
[29]The UK P&I Rule 2 section 25, North Rule 19(20), Gard Rule 46 & 44, West of England Rules of Class 1 section 24
[30]The UK P&I Rule 2 section 22, North Rule 19(19), Gard Rule 47, West of England Rules of Class 1 section 21